Part 4 of the Revenue management 101 series will tie together the lessons from our past segments. Be sure to go back and catch up with parts 1-3 if you haven’t checked them out yet. To recap, part one covers the ins and outs of revenue management basics, part two discusses dynamic pricing as step 1 to managing your hospitality business’s revenue, and part 3 dives into setting stay restrictions and managing booking channels as steps 2 and 3. In our 4th and final segment, we’ll examine overselling and managing group and corporate business.
Step 4: Overselling
Overselling (or overbooking) is a technique used in Revenue Management to offset future cancellations and no-shows. In other words, if you expect 2 cancellations and 1 no-show, you oversell by 3. That’s the optimal strategy for maximizing your revenue.
Still, even as simple as this idea is, not very many hoteliers wholeheartedly embrace this practice. In fact, it’s very common for most managers (especially at smaller properties) to close out availability on all channels even before they reach the 100% occupancy mark for a certain day. In most cases, this decision is driven by the fear of having to walk a guest.
However, when overbooking practices are correctly implemented, the chance of having to walk a guest will be minimized while leading to a noticeable increase in revenue (as well as profits). One doesn’t need to have a lot of Revenue Management experience or knowledge to be able to achieve this goal.
Step 5: Managing Group and Corporate Business
“Managing group and corporate business” means assessing the profitability of these booking channels and managing them to maximize revenue and bottom line profit for your hotel.
To make the right choices, when deciding to accept or reject a group business opportunity, we need to run through an exercise called displacement analysis. We do this by comparing two alternatives. The first alternative is the potential of generating revenue from a group request or a corporate contract (which immediately benefits your hospitality business by adding revenue through rooms sold at a specific negotiated price, plus expected additional revenues generated from other departments). The second alternative is revenue generated from expected sales of the same amount of rooms to transient business (potentially, at a higher price). You can determine the breakeven price to be quoted to a group or a corporate contract by finding the point where the potential revenue from both alternatives is equal, which means that the hotel won’t be at a loss by accepting the contract.
By performing a displacement analysis you may discover that, in order to improve profitability, sometimes it’s necessary to limit (or decline) a group business opportunity for one of the following reasons:
1) Your transient booking channels don’t anticipate the deep discounts that are normally offered to groups, resulting in a higher ADR.
2) You free yourself from the risk of having a large number of the group’s booked rooms canceled (even if you set strict group cancellation rules, this risk still exists, )
Due to these reasons, every group or corporate request needs to be analyzed in order to assess its revenue potential against the displacement of expected transient business.
We hope you’ve enjoyed our series on Revenue Management 101 and start implementing these tactics at your property as a way to increase your profits. If you’d like an extra hand in managing your pricing, Cloudbeds has a Pricing Intelligence Engine (PIE) that serves as an all-in-one competitive intelligence dashboard. You can use PIE to help you make better pricing decisions. Learn more.
Ira is Pricing Intelligence Product Manager for Cloudbeds. Ira is also the co-founder of iRates. She was selected as Top 5 Revenue Managers in the country in 2013 by HSMAI. With a background in sociology and marketing research, she has been able to apply her knowledge and experience to the hotel industry and develop many innovative ideas.